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A forecast for the Irish economy
published today says 2011 will be another year of recession; unemployment will
be as high as 14% in 2014 despite high emigration but a leaner, more competitive
Ireland should be in a position to return as one of the stronger growing
Eurozone economies in the longer-term.

Big 4 accounting firm Ernst &
Young’s Winter Eurozone Forecast (EEF) says the Irish government assumes GDP
(gross domestic product) growth will average 2.75% in 2011-14. By contrast, the
EEF sees on average only 0.8% growth per year during that period.

The
forecast comprises another year of recession in 2011, with GDP declining by
2.3%, after a shrinkage of 1.5% in 2010, and before climbing gradually to growth
of 2.5% in 2014. In the forecast, employment is not expected to increase until
2013 and Ireland’s unemployment rate is expected to still be as high as 14% in
2014. This bleaker unemployment outlook than presented by the Government holds
despite a cumulative working age population net migration outflow of 170,000
persons between 2010 and 2014.

Ireland will remain amongst the
bottom three performers in terms of employment growth between now and 2014 with
an average annual employment rate of 14.7%, just ahead of Greece (14.8%), well
ahead of Spain (19.8%) and in comparison to the Eurozone average of 9.6%.

The EEF says that the main drag on Irish GDP growth in the next two years will
come from a drop off in domestic demand. Beside the direct negative impact of
the fiscal measures, growth will be dampened by a range of related factors that
include a large out migration flow of people (and their skills and spending) and
a likely rise in retail interest rates that will impact on consumer spending and
housing repossessions.

Domestic demand is forecast to fall by 4.7% in 2011 and a
further 2.2% in 2012, with falls in consumer spending of 4.3% and 2.2%, and
investment of 9.5% and 2.4% respectively.

Marie Diron, senior economic
adviser to the Ernst & Young Eurozone Forecast comments, “If the short-term challenges can be managed and overcome, while
maintaining a long-term strategic focus, then a leaner, more competitive Ireland
should be in a position to return as one of the stronger growing Eurozone
economies. This currently seems a long way off and the Irish government and
economy will have to overcome numerous hurdles in the meantime.”

The EEF says the Eurozone
economy has put in a robust performance for much of 2010 but a slowdown is
expected next year with GDP growth only reaching 1.4%. However, growth is
expected to be very uneven across the 16 countries. And with major downside
risks looming, the ECB needs to stand ready to implement additional significant
measures to support the European economy in case of a crisis.

Recent government assurances
that Ireland will keep its competitive corporation tax rate of 12.5% will help
the country in attracting foreign direct investment, Barry O'Leary, CEO of IDA Ireland,
told CNBC. O'Leary considers the outlook for foreign investment into Ireland:

State agency Forfás reported last March that
total permanent full-time employment in the manufacturing and internationally
traded services sectors amounted to 272,053 in 2009. It was 276,287 in 1998.
Employment in foreign-owned firms was 132,596 in 2009 and 140,281 in 1998.

More than 50% of merchandise exports are from the chemical sector; these goods
have a high import content and the sector employs less than 30,000 in a
workforce of over 2m.

Eurozone GDP growth in 2010 is estimated to be 1.7%, slightly better than EEF
had expected earlier in the year but a look at the composition of growth offers
little room for complacency. Restocking has accounted for 80% of growth this
year but by its nature this is temporary and going forward will disappear. Much
of the slowdown in 2011 is accounted for by fiscal tightening, which EEF
estimates will amount to more than 1% of GDP.

Marie Diron said, “The Eurozone is likely to muddle through this crisis.
However, even in this best-case scenario growth is heavily reliant on the
Northern countries of the region. Inevitably there will be growing divergence
with the South. Moreover, each episode of turmoil on financial markets makes
much worse scenarios more likely to happen.”

3 speed Europe

Germany is driving the Eurozone
economic recovery with GDP growth of 3.5% forecast this year and 2.1% next with
pre-crisis levels of GDP to be reached by the end of 2011, much sooner than
originally expected. Both exports and more recently, domestic business have
contributed significantly to the recovery in Germany. Countries closely linked
to the German economy, in particular Slovakia (2.8%) and Austria (2%) are also
predicted to grow steadily in 2011. More modest growth is forecast in other
major ‘Northern’ countries including France and Netherlands (both 1.8%).

EEF forecast GDP growth in the peripheral countries in 2011 to range from -3.3%
in Greece to -0.7% in Portugal. This could be considerably lower if the
peripheral economies face renewed turmoil in bond markets and need to implement
yet additional deficit tightening measures.

Worst case scenario points to a renewed crisis

The usual uncertainties around
any forecast of the Eurozone are exaggerated by the current sovereign debt
crisis. EEF estimates a probability of only 45% for the relatively benign growth
of 1.4% in 2011. Also likely (25%) is a more sluggish recovery as weakening
domestic demand is compounded by banks struggling to mend their balance sheets
in the face of further stress tests. Here GDP growth struggles to reach 1% in
2011 and only 0.8% in 2012, compared to 1.4% and 1.7% respectively in the
baseline.

A worst case scenario (estimated at 10% probability) is that an escalation of
the sovereign debt crisis would lead to a significant restructuring of
peripheral Eurozone government debt and could ultimately lead to a full-blown
financial crisis. EEF has forecast, if this were the case, GDP growth for the
Eurozone would be significantly negative, as low as -2% to -3%, for a couple of
years and more than cancel out any recovery seen to date. If such a crisis were
to occur in 2011, Eurozone GDP would still be around 3.5% below pre-crisis
levels at the end of 2014.

Mark Otty, Area managing partner, Europe, Middle East, India and Africa for
Ernst & Young said, “The unpredictability of the economic situation across
the Eurozone is making it increasingly difficult for corporates to plan ahead.
As pessimism prevails around GDP growth in many parts of Europe businesses
remain conservative about future investment and recruitment plans.”

Leaders of Germany and France met to plot strategy before a key EU summit. Richard Cookson, CIO for Citigroup Private Banking, joined CNBC for more on the European crisis:

Quantitative easing could raise GDP by 2% by 2012

The European Central Bank (ECB) has
appeared to close the door on following the US Federal Reserve and engaging in
quantitative easing to boost the economy. However, EEF believe that if the
Eurozone is hit by a new crisis, the ECB should be ready to reinstate aspects of
the liquidity measures of 2009 and 2010 and should not rule out quantitative
easing.

The impact of the Fed’s second
quantitative easing (QE2) phase, in the United States, has shown significant
potential positive effects for the US economy. This is supported by observed
changes in US financial markets since the announcement of QE2. The ECB’s New
Area-Wide Model suggests that the impact of quantitative easing in the Eurozone
could be even more significant than in the US, raising GDP by about 2% by 2012.
Further positive effects would result from higher share prices and a weaker
euro.

Diron comments,
“It is a concern that the ECB appears to have rejected outright the option of
using quantitative easing. It could then be left with very little effective
ammunition to counter the negative impact of a renewed Eurozone sovereign debt
crisis as it is difficult to see how it would achieve such effects using its
current set of tools. A ‘plan B’ for Eurozone monetary policy is needed given
the downside risks to growth.”

Interest rates to remain low
until the end of 2011

Diron comments, “The robust
growth results of the first part of 2010 may have encouraged the ECB to believe
that the recovery was well engaged and that the Eurozone could support tighter
monetary conditions. However, the Irish crisis has highlighted the fragility of
the Eurozone economy and the need for monetary policy makers to use all weapons
available to buffer the negative impacts. The ECB needs to continue to monitor
the highly uncertain impact of fiscal tightening and developments in financial
markets to stand ready to provide more support if required.”

EEF believes that given monetary conditions have tightened significantly since
the spring as the ECB has started to wind down its lending to the Eurozone
banking sector, pushing interbank rates up, interest rates should not be
raised until the latter part of 2011.

Labour market concerns

The EEF says divergent economic
conditions are particularly apparent in the Eurozone labour markets with current
unemployment rates ranging from 4.3% in Austria to 20.5% in Spain. This
divergence in unemployment rates is expected to remain high over the next few
years. Employment rates in the peripheral countries are expected to be flat at
best, dampened by cuts in public sector jobs and the negative impact of the
tighter government budgets on the private sector.

Meanwhile, in the rest of the Eurozone, employment growth is expected to pick up
modestly through the course of 2011. Overall, these divergent conditions support
that the level of unemployment in the Eurozone as a whole is unlikely to fall
over the next year or so. EEF do not expect the number of unemployed in the area
to fall below 15 million before 2013.

Challenging times ahead as downside risks remain high

Diron concludes,
“The level of growth experienced in 2010 is unlikely to follow through into the
new year as downside risks remain high. Further worsening of the turmoil on
Eurozone bond markets is possible given ongoing concerns about public finances
and banking sectors. If this led to sovereign defaults, the Eurozone would
likely be plunged back into recession. Against this backdrop, the ECB needs to
keep monetary policy accommodative for some time and be prepared to step up the
range of tools that it uses.”